Gaping US trade gap: Sign of weakness? Not necessarily
President Donald Trump ripped into one of his favorite targets Thursday in Beijing: The United States’ “shockingly” large trade deficit with China.
America’s lopsided trade relationship with China and with the rest of the world is a familiar theme for Trump and his economic team. They’ve branded trade deficits a mark of economic weakness that depress growth and kill jobs.
Yet most economists say their ire is misplaced. They reject the notion that trade is a zero-sum game in which victory goes to the countries that run a trade surplus by exporting more than they import.
“Focusing on the trade deficit as a sign of weakness is fundamentally flawed,” says Bryan Riley, a trade analyst at the conservative Heritage Foundation.
In fact, a swollen trade gap – which shows how much the value of imports exceeds the value of exports – can reflect economic might: When times are good, after all, consumers feel more prosperous and confident enough to spend freely – on imported goods as well as on home-grown goods.
Consider what happened in 2006, the year before the Great Recession began. The economy grew at a solid 2.7 percent. Yet that same year, the United States posted a record-high trade deficit: $762 billion.
By 2009, in the depths of the recession, the trade deficit had actually shrunk to $384 billion. The main reason: Fearful American consumers had reduced their spending on imports – and everything else.
One reason Americans spend so much on imports: A nearly limitless array of foreign products gives them a multitude of choices and lower prices. Last year, the United States ran a deficit of nearly $505 billion in goods and services with the rest of the world – including a $309 billion gap with China.
So far in 2017 through September, the U.S. trade deficit has widened by more than 9 percent over the same period last year.
That said, the flow of inexpensive imports into the United States can inflict pain on some areas of the country. Competition from China, for instance, has long punished the American Midwest and the textile-producing Southeast hard, wiping out hundreds of thousands of manufacturing jobs.
Trump argues that China, Mexico and some other countries exploit unfair trade deals to boost their exports to the United States and block imports. Many Democrats agree. So do most economists. China is notorious for subsidizing its exporters and pilfering other countries’ trade secrets.
But the main factor behind America’s vast trade gap goes well beyond any country’s bad behavior: The United States spends more than it saves. This trend shows up as budget deficits in Washington and credit-card balances in American households. When you spend more than you produce, imports fill the gap.